Is The Russell Sending a Warning?
You have probably already heard how the cash-heavy Tech sector is leading the way in this cyclical bull market run. Some of the giant tech companies have had sizable rallies. But is the Tech sector's little brother, the Russell 2000 Index, sending a warning message?
As stock markets rebounded after the 2001-2002 recession, large market-cap tech stocks and small cap stocks (e.g. Russell 2000 Index) led the way up, with both sectors posting huge gains during the 2003-2007 cyclical bull market rebound. (Please refer to the chart below. The Nasdaq 100 Index is represented as a blue line chart, while the Russell 2000 Index is in black. The bull market run of 2003-2007 is indicated by the red arrow to the left.)
In early 2007 both indices were marching higher, but by the middle of that year, the Russell 2000 had begun to falter. The Nasdaq 100 continued its surge, until it likewise ran out of gas sometime in November. This divergence can be seen by observing the market price action within the vertical red rectangle to the left. Notice how the Russell 2000 topped first in May of 2007, while the Nasdaq 100 continued higher before placing its ultimate top sometime in November. What followed was a stock market slaughtering as the financial crisis began to unravel.
Let's move to the present. Admittedly, the world is now different. For instance, global central banks are much more aware of potential dangers within the global economy. But there is a similar chart set-up in place that is worth noting. The current cyclical bull market (2009 – present) is shown alongside the second red arrow, with the dramatic rallies by both indices shown. But if you inspect the second vertical red rectangle, you will notice how once again the Russell 2000 Index has faltered first. For instance, the Russell 2000 Index's current rebound high was placed in April of last year, while the Nasdaq 100 has continued to reach new heights.
Is the Russell 2000 once again warning of a difficult time for stocks? Will the chink in the Russell's armor again be prescient? We can't know for certain and only time will tell, but I personally am a more confident bull when divergences of this type are not in place. For the remainder of this year, it's probably wise to watch and compare the Russell 2000's performance relative to the Nasdaq 100's. A continuance of this divergence may again prove to be problematic for stocks. On the other hand, a surge to new all-time highs by the Russell 2000 Index after a respite would certainly be a stock friendly development.
Dominic Cimino
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.
© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
Important Disclosures
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